Still Benefiting From Favourable Supply-Demand Dynamics
LME aluminium prices are still hovering at a 13-year high amid the ongoing twin supply-demand shock. Besides systemic catalysts leading to favourable price and cost dynamics, the fully operational smelting capacity is set to supercharge a two-year net profit CAGR of +43% from 2021 even after the record year. The recent 2% private placement exercise with RM971m being raised is expected to be completed by 2Q22. No change to earnings forecasts. Maintain BUY. Target price: RM7.50.
WHAT’S NEW
• LME aluminium prices still at 13-year high, way above our 2022 assumptions. After a rollercoaster ride in 4Q21 with prices hovering at US$2,490-3,180/tonne, LME aluminium prices touched an all-time high at US$3,985/tonne before retreating to the current level of US$3,443/tonne (ytd average: US$3,263/tonne). That said, it is still at a 13-year high, way above our conservative assumption of US$2,500/tonne in 2022. Besides favourable structural demand globally from low carbon emission, electric vehicles (EV), renewable
energy (RE) and infrastructure, LME aluminium prices are also elevated by supply tightness from partial plant shutdowns, power rationing in China as well as supply disruption caused by the Russia-Ukraine war. Riding on such favourable trends, Press Metal Aluminium Holdings (PMetal) has hedged 60% of its aluminium sales volume at US$2,400/tonne for 2022 and 35% of US$2,500/tonne for 2023 (update as of Mar 22).
• Still favourable alumina-to-aluminium price ratio despite higher alumina prices. Following the supply disruption caused by the Russia-Ukraine war, alumina prices touched US$500/tonne before moderating to US$432/tonne. That said, it is still near a favourable alumina-to-aluminium cost ratio at 12.6% (even at US$500/tonne, it is still at 12.5% ratio). Note that we have already assumed a higher alumina cost ratio at 15-16% of our aluminium spot price assumption. Based on our sensitivity analysis, every US$20/tonne increase would reduce PMetal’s earnings by RM132m, assuming no hedging is done on a fixed US$2,500/tonne aluminium price and vice versa.
• Leveraging on its decent equity structure to finance growth. PMetal has fixed the issue price of 163.4m placement shares at RM5.94/share, which is expected to raise RM970.6m for the purpose of capex/working capital/repayment (21%/67%/12%). The meaningful proceeds will allow the group to upscale its operations with a mere 2% dilution, showing positive leveraging on its decent equity structure. On capex, we gather that RM100m will be spent to increase extrusion capacity of aluminium battery case for EV which could lead to better margins progressively. Meanwhile, we believe that it is crucial for the group to build up a high level of inventory as the current twin supply-demand shock and global decarbonisation continue to benefit Green Alu smelters with additional capacities.
STOCK IMPACT
• Favourable supply-demand dynamics and hedging to catalyse two-year net profit CAGR of 43% from its peak year. We believe that aluminium supply will remain tight at least for the next two years on the back of: a) shrinking output from China on the restriction of smelters’ power usage and tonnage production by 2024, b) global decarbonisation drives to hinder support of coal-based smelter projects (China: 88), and c) scarcity of hydropower sources at strategic locations and high investment capex for hydro-based smelters (at only 25% globally), aside from the short-term disruptions from Guinea, China and Russia. Meanwhile, demand dynamics remain favourable, premised on all-clean energy applications like EV, RE packaging, power transmission and construction. Riding on the high, the group has hedged 60% of its aluminium sales volume at US$2,400/tonne for 2022 and 35% of US$2,500/tonne for 2023 (update as of Mar 22), vs current LME spot price of US$3,443/tonne.
• Clear roadmap for ESG sustainability. Beyond the usage of clean energy (hydropower) for its operations and registration of Green Aluminium products, the group has committed to achieve 15% and 30% greenhouse gases (GHG) reduction by 2025 and 2030, as compared to the 2020 baseline. Beyond that, PMetal commits to achieve carbon neutrality by 2050 and 10% water withdrawal reduction by 2030 as compared to the 2016 baseline. With these standards in place, we believe PMetal’s investability is further solidified and makes PMetal a preferred ESG investing target.
EARNINGS REVISION/RISK
• We make no changes to our earnings as we believe that the 2% dilution from the private placement could be offset by the earnings contribution from new extrusion capacity of aluminium battery case for EVs.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged target price of RM7.50, still based on 29.0x 2022F PE (which is at its -0.5SD below its five-year forward PE mean). Should aluminium prices remain elevated, based on our sensitivity analysis, every US$100/tonne increase to our current spot aluminium price assumption of US$2,500/tonne in 2022 would increase PMetal’s earnings by 9% annually, assuming alumina cost of US$388/MT (implies around 15.5% cost ratio) and carbon anode prices of Rmb4,625/MT. Assuming a similar PE being ascribed on LME aluminium price assumption of US$2,600/tonne in 2022, this could mean a 10% upside to our target price of RM7.50, at RM8.30.